Research and analysis

Turkey - interest rate cuts

Published 23 January 2015

This research and analysis was withdrawn on 17 May 2019

This page has been withdrawn because it is out of date.

0.1 Summary

Turkey’s Central Bank benchmark interest rate cut more than expected by 0.5%. Further cuts possible in Bank’s quest to reap benefits of lower global oil prices. Further pressure likely to cut rates furtherStill plenty of opportunities available for UK companies.

0.2 Detail

Turkey’s economy grew by 2.8 % in the first nine months of 2014, compared with the end-year forecast of 3%. Industrial production and exports slipped back in the autumn. In early January, Deputy Prime Minister with responsibility for the Economy Ali Babacan said 2014 growth had been unsatisfactory.

On 20 January the Central Bank of Turkey (CBT) cut its benchmark interest rate by 0.5% from 8.25% to 7.75% at its first monetary policy meeting of 2015. The market had expected no change in rates or a 0.25% cut. Overnight borrowing and lending rates remained unchanged at 7.50% and 11.25% respectively.

In its statement, the CBT noted that the fall in commodity prices, particularly oil, pointed to a decline in inflation in 2015. The Bank would continue to be cautious and preserve a tight monetary policy. In its latest expectations survey, the Bank forecast 2015 year-end inflation of 6.8% and growth of 3.4%. After initial fluctuations, markets reacted neutrally to the rate cut.

On 16 January, ahead of the interest rate announcement, President Erdogan criticised high domestic interest rate levels at a time when rates were being cut globally. He said: “Things cannot continue this way. They can say Central Bank is independent. I’m independent too. If necessary, I will call them and talk about it”. After the rate cut, the President and government ministers said it was too little, too late. Economy Minister Nihat Zeybekci said current interest rates were “unreasonable”. Deputy Prime Minister Numan Kurtulmus said growth, inflation and employment targets were in jeopardy because of the CBT’s decision.

Some ocbservers are reporting that the rate cut was a “compromise solution” which would provide breathing space for the Bank Other analysts note that monetary policy tools alone may not be sufficient to boost Turkey’s growth, given the need for structural reform.

0.3 Comment

Although larger than expected, the CBT’s decision is not surprising, considering the sharp fall in world oil prices and its positive impact on inflation in Turkey. Every $10 per barrel drop in oil prices saves Turkey around $4 billion annually in energy imports.

0.4 Disclaimer

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